What’s the status of the stock market right now? If you look at Citigroup’s oft-cited Panic/Euphoria model, the market is in a panic. According to CNBC, the Panic/Euphoria model officially hit “panic” levels to kick off the New Year.
The Panic/Euphoria model is meant to measure stock market investor sentiment over time. When the model is tilting toward “euphoria,” it means that investors are optimistic about the state and direction of the stock market. When the model hits panic levels, it means that investors are, for one reason or another, fretting about the market.
What does it mean?
The model has an excellent track record of predicting pullbacks and surges. It reached “euphoria” levels in 1999 before the dotcom bubble in 2000. It also broke into “panic” levels back in 2016 before the big post-election rally. The model also hit euphoria levels to end 2017 and we know what happened in 2018. It’s really pretty simple when there is euphoria – be afraid, when there is panic – keep your wits about you and take advantage of the opportunities. “If everyone is thinking alike, then somebody isn’t thinking.” – G. Patton
This negative sentiment is great news for investors as the model indicates strong upward moves on the horizon. Traditionally gains near 18% over the next 12 months.
What Happened in December?
Certainly, investors have good reason to be concerned about the stock market at this moment in time. By every measure, December 2018 was a bad month for the stock market. Stocks plummeted, and the S&P 500 Index dropped nine percent. The S&P hasn’t had a worse December since 1931, in the middle of the Great Depression. The drop was also big enough to tarnish the stock performance for the entire year. For 2018 as a whole, the S&P 500 plunged 6.2 percent. It’s the worst year-over-year performance the market has seen since 2008 when a (much bigger) 38 percent drop heralded the start of what is now known as the Great Recession.
Why was December so bad?
Trade Wars, Fed Rate Hikes and maybe most important but hardly mentioned at all……….
Hedge Fund Closings
A large part of the market slump in late December had to do with Hedge funds closing. Hedge funds which operate on a 2 and 20 model. 2 % management fee and 20% of total gains, closed at record numbers in 2018 because of poor returns. Many of these hedge funds were selling off positions mightily the last 2 weeks in December 2018 which forced the market downward as they prepared to reconcile redemptions. This behavior is an anomaly and will not be a factor as the market looks to rebound in 2019. Eventually those redemptions will come off the sidelines and back into the market and will result in upward movement.
Another fear in December was that the Federal Reserve had possibly made a monetary policy mistake in its continued hikes of interest rates. Jerome Powell, the chairman of the Federal Reserve, has since said that he is flexible about future tweaks to monetary policy. Powell said that the Fed is being “patient” and will watch how the economic situation evolves before making further monetary policy decisions. While not a promise of reduced hikes or increased stability, Powell’s remarks seem to have eased the fears of some investors, who saw the Fed’s recent maneuvers as harbingers of trouble to come for the global economy.
The arrival of jobs data for December 2018 also seems to have eased the worries of panicked investors. A report was recently released, indicating that the United States economy had added 312,000 jobs in December. This number was higher than anticipated, especially given the seemingly unstable nature of the economy. The jobs report aligned with gains in the stock market.
These factors indicate that the stock market may well be headed for a rebound.